Lawsuit forces California to delay note, bond sales by one day

California must delay by one day its $10 billion note sale this week because of a lawsuit filed Tuesday that challenges the state’s plan to sell and lease back 24 state buildings on 11 sites.

The state was counting on the sale of buildings to help close a hole in the current fiscal year’s budget. If the sale cannot be completed before June 30, it would reduce revenues in fiscal year 2010-11 by $1.2 billion.

On Monday and Tuesday, retail investors placed orders for $5.89 billion of the RANs, which are short-term debt securities the state sells to help even out its cash flows. Those orders now have to be reconfirmed in light of the new disclosure. All orders not canceled before Thursday at 7 a.m. Pacific time will be deemed confirmed. The state treasurer was supposed to wrap up the RAN sale today, after institutions had their chance to place orders.

Instead, it will continue to accept retail orders through 5 p.m. today and will take institutional orders and set the final price and yield on Thursday.

Buyers were quoted a tenative yield of 1.25 percent for RANs maturing May 25 and 1.5 percent for those maturing June 28. Those yields could change. Individual investors unhappy with the final yield can cancel their orders.

To buy RANs, investors must have an account at a participating brokerage firm. For a list of firms and to learn more about the sale, go to www.buycaliforniabonds.com.

The lawsuit also will force the state to postpone its sale of $2 billion in taxable debt, mostly Build America Bonds, by one day. It will sell them Friday instead of Thursday. It still plans to sell $1.75 billion in tax-exempt general obligation bonds as schedued on Tuesday.

The sales come at a tough time in the municipal bond market. Muni bond prices started tumbling last week, in part because investors are wary of a coming supply glut. State and local goverments plan to sell about $26.3 bilion in debt over the next month, the most since February 2005, according to Bloomberg.

When bond prices fall, yields rise, making it more expensive for governments to borrow money.

“We launched this (RAN) sale in some pretty rough waters. Given the market conditions, we’re pleased with the retail demand,” Tom Dresslar, a spokesman for the California treasurer’s office, says.

UPDATE: Rating agency Standard & Poor’s said the lawsuit does not affect its rating on the RANs. It rated the issue SP-1, one notch below its highest short-term debt rating of SP-1-plus. “Pro forma cash flows developed by the state anticipate receipt of cash from this transaction in January 2011. However, our assessment of the state’s cash flow and ability to retire the notes later in the year included consideration of scenarios in which these and certain other revenues did not materialize as cash,” S&P said.